Apple's cheap iPhone not so cheap

Friday 13 September 2013 | 16:05 CET | Market Commentary

Contrary to expectations, Apple has not launched a much cheaper version of the iPhone. The new iPhone 5C without a service contract will cost USD 549 for the 16GB version or USD 649 for 32GB. Apple notably highlighted the prices with a contract, of respectively USD 99 and USD 199.

The price difference with the iPhone 5S is small. The iPhone 5S will be available with 16, 32 or 64 GB, for respectively USD 649, 749 and 849. With a two-year contract at US operators AT&T, Verizon or Sprint, the smartphone costs respectively USD 199, 299 or 399.

The introduction of the new iPhone appeared business as usual for Apple. The company has added a few component improvements and some new functions, while the appearance of the phone is largely unchanged. The hardware and software specifications are again among the top in the market, and the new iOS7 is, according to Apple, the biggest overhaul yet of the system since the introduction of the first iPhone in 2007.

Apple is staying at the top end of the smartphone market. Its latest models maintain Apple's position as a premium brand, also in terms of price. And this is what's surprising about the launch.

Figure 1: Apple iPhone sales. Source: Apple IR.

Apple has been among the top three smartphone makers worldwide for some years now, thanks to its high-quality devices and its image as an innovator. However, now that the form factors and parameters of the market for mobile devices are largely fixed, Apple's room for manoeuvre has become limited.

The company is in a difficult position. Apple has relied in recent years on the iPhone as its most important product, while also profiting from the emergence of the tablet market and the dominance of its iPad. But with product margins declining and competition intensifying, it's becoming increasingly difficult for CEO Tim Cook to maintain the growth of the past six years without making concessions on price.

Apple was expected to come with an answer to competitors offering smartphones at rock-bottom prices. The question is whether the iPhone 5C is low-cost enough to generate demand in countries such as China and India. Local players in these countries, such as Xiaomi (China) and Micromax (India), are successfully launching their own high-specification smartphones for half the price of the iPhone 5C.

A model priced at around USD 99 without a contract could have helped Apple break into especially the Chinese market, with its more than 1 billion subscribers. At USD 549, the iPhone will remain a premium product, well out of reach for the average Chinese person - or anyone else with a relatively low disposable income.

While the iPhone 5C offers an alternative to the somewhat pricier iPhone 5S, it doesn't add much more. Apple is doing an admirable job maintaining its super-strong premium brand. But how long can that continue and at what price?

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